Regulatory: The legal landscape for procurement in Canada has changed significantly

Contract A is no longer the only relevant legal issue in procurement. All purchasing authorities and bidders must now consider two streams of obligation (or, for bidders, two potential streams for challenging procurement decisions): first, what are the organization’s contractual obligations under Contract A (if it exists) and, second, what are the organization's procurement governance or regulatory obligations?

Make no mistake, these new developments are not just relevant for public sector entities. They affect all purchasing authorities and understanding these rules is the foundation on which all bidder challenges should be based.

Contract A: The Age Old Approach

Until relatively recently, procurement law in Canada was the purview of case law, focusing on cases heard by the Supreme Court of Canada (SCC).

The first, and seminal, case is The Queen (Ont.) v. Ron Engineering & Construction (Eastern) Ltd., where the SCC first articulated the Contract A/Contract B analysis. Contract A is the contract that is made when a bidder submits a bid in response to an invitation to tender (or similar document). Contract B is the agreement that will be formed between the procuring authority and the winning bidder.

In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., the SCC clarified that Contract A canonly be formed between a procuring authority and compliant bidders. That is, a procuring authority is contractually obliged through Contract A to accept only compliant bids, and only compliant bidders have legal remedies arising from the procurement process as against a procurement authority. The third case, Martel Building Ltd. v. Canada, affirms that there is a duty owed to treat all compliant bidders fairly and equally, but always with regard to the terms of Contract A as set out in the competitive procurement documents (in this case, a tender call).

Most recently, the fundamental principles of the implied term of fairness versus the enforcement of Contract A on pure contract law principles was tested in the Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) case, in which the SCC refused to enforcea waiver clause with respect to damages arising out of a breach of Contract A. This case required the SCC to face the competing tension between the implied obligation of fairness in procurement and the principle that courts should enforce valid contractual terms. It appears that in a conceptual battle between the right to contract and public policy to protect the integrityof fairness in competitive procurement processes, the “fairness” obligation has prevailed.

The New Frontier: Procurement Governance and Regulation

The important new development in the Canadian procurement context is the bifurcation of procurement into a "contract stream" (as described above) and a procurement “governance” or “regulatory” stream. It is the governance/regulatory stream that has been steadily building in significance in Canada (with increasing intensity in the past five years).

This governance or regulatory stream has three components: procurement restrictions in trade agreements (for example NAFTA, WTO agreements, Agreement on Internal Trade, etc.); the introduction of statutes, regulations and directives (for example, the Broader Public Sector Accountability Act (Ontario) and the Management Board of Cabinet Procurement Directive (Ontario); and internal "corporate" procurement guidelines. Each of these regulatory/governance instruments imposes a required framework for procurement including rules as to when (and if) competitive procurements are required, how “open” the procurement must be (depending on thresholds of price/cost), acceptable approaches to competitive procurement and basic requirements of fairness and transparency.

What is most interesting about this new stream of procurement law is that the means of enforcement of these obligations by bidders is not yet clear. It is likely that judicial review is one option, but the relationship between judicial review and the enforcement of Contract A rights and obligations has not been tested in any significant way. It is also likely that the procurement governance framework of an organization will establish a standard of fairness against which the organization will be measured, even in a dispute based on Contract A principles. The relative importance of these standards versus the explicit terms and conditions of Contract A is a matter that is likely to be before the courts in the near future.

Bidders and procuring authorities (in both the public and the private sector) should be very concerned with a number of practical questions related to these new developments:

Will bidders need to assert a claim by way of both judicial review and breach of contract if they have been treated improperly in a procurement process?

Will the standard of care for “fairness” be the same in both the Contract A and the judicial review streams?

Can purchasing authorities “contract out” of the standards of the governance or regulatory framework through careful drafting of Contract A?

If the purchasing authority is intentionally running a nonbinding competitive procurement process (i.e. no Contract A), what rules apply to the procurement? Is the flexibility of a nonbinding procurement process lost under this new stream of procurement law?

Are bidders now in a position to challenge both nonbinding and binding competitive procurement processes (on the basis that even a nonbinding competitive procurement process can breach procurement governance obligations)?